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Softer interest rates hurt DBS more
Siow LiSen
The Business Times
Wednesday, 27 January 2010
Contrary to expectations, interest rates in Singapore have weakened, albeit marginally, from mid-December levels. But while the fall is small, it is not good news for banking giant DBS Group Holdings.
The
key 3-month Sibor or Singapore interbank offered rate has
eased from 0.68542% to 0.68328% on Dec 14 and
has slid a tiny bit more to 0.67808% since Jan 14.
It's a bit of a head scratcher because all the expectations had been for a tightening, all the more so because of China's move to rein in its monetary policy earlier than speculated.
Since the 3rd quarter last year, many have forecast that interest rates would rise gradually this year as governments try to implement exit packages because of worries over deficits and inflationary pressures.
Consumer prices rose an average 0.2% last year after gaining 6.5% in 2008.
The Monetary Authority of Singapore (MAS) has forecast that inflation will average 2.5 to 3.5% this year.
Sibor may have slipped
because of larger inflows from expectations that the
MAS will let the local dollar rise in its next policy monetary review in April.
Of course, the interest rate direction could turn any day now and the movements in Sibor have been too slight to be significant for most people. But for DBS, which has huge amounts of deposits and is faced with projected sluggish loans growth, a flat or even small fall in interest rates could be a headache.
Growth for the loans sector was a weak 1.8% in November 2009, as shown by latest available data.
Writing yesterday, Leng Seng Choon of DMG & Partners said that he expects DBS to post a stronger FY09 net profit, but due largely to the robust trading income of the first nine months in 2009, a volatile segment. DBS reports FY09 results on Feb 5.
Mr Leng is projecting FY09 net profit of $2.14 billion, up 11% from FY08. While FY09's other non-interest income is expected to be robust (with 9M09 recording $667 million, up 84% year-on-year, due mainly to a strong showing in the volatile trading income), this could be largely negated by provisions surging 58%, a consequence of the global economic downturn.
'We forecast weak FY10 core earnings growth, on the back of continued Sibor weakness and soft loan expansion,' he said. He noted that the 3-month Sibor averaged 0.68% in 4Q09, similar to that in 3Q09. This was half the 1.33% for 2008.
DBS, with a low S$ loan-deposit ratio of 56.9% (versus 71.2% for the overall group), will enjoy lower interbank yields, which could keep its Singapore net interest margin narrow, he said.
Even with a higher spread from the Hong Kong interbank rate, which is a positive for its DBS Hong Kong unit, this will be somewhat offset by increased loan competition there.
Mr Leng forecasts narrower net interest margin for DBS compared with its peers.
Fundamentally, this should be a good year for DBS as long as the economy continues on its recovery. But DBS's strength and Achilles heel have always been the same - the fact that it is government-linked, and so depositors feel safe and leave their money there. The bank has tried to counter this by paying almost nothing for deposits.
Still, at the end of September 2009, DBS's deposits still grew 1% from the previous quarter to $180.2 billion. That was 65% more than the $116.5 billion held at United Overseas Bank and way above OCBC's $96.9 billion.
If interest rates remain soft, DBS will face a much tougher climb with its mountain of deposits. A silver lining here could be that it won't be so bad for borrowers.
